Friday, April 20, 2018

Beartooth Electric begins management transition

Beartooth Electric Cooperative began introducing members to a new management arrangement at a series of community meetings that started Mar. 30.
The co-op board and management planned four meetings throughout the service area to present plans for the future and answer questions from members. Meetings have been held in Roberts on Mar. 30, Fishtail on Mar. 31, and Clark, Wyo. on Apr. 1. The fourth meeting will be held at the Columbus City Hall on Apr. 2 at 7 p.m.
Interim manager Dick Peck reviewed the past few years of his tenure during the Mar. 31 meeting in Fishtail. Beartooth’s rates are high for several reasons, including the cost of Beartooth’s bankruptcy and Southern Montana Electric Generation and Transmission Cooperative’s bankruptcy, he said. Beartooth has been contracted to purchase electricity from Southern as part of a long-term agreement.
Peck said Beartooth also has the lowest average kWh sales per meter in Montana, which he described as both a challenge and an opportunity. Beartooth also has a high electricity distribution cost per meter, with only two meters per mile of line on average.
Beartooth’s bankruptcy crisis is now under control, Peck said, and its finances are in order. Operation costs have also decreased during Peck’s tenure, in part due to staff reductions from a high of 24 employees three years ago to 15 employees now. Beartooth will soon be down to only 13 employees.
The new management strategy that has been adopted should further reduce costs for the co-op, Peck said. A study conducted earlier showed net savings for Beartooth of $800,000 in the second year of the new management arrangement, even after paying for management expenses.
High Rates
Beartooth currently has a high residential electric rate with an average of 17.1 cents per kWh. This is the highest rate of any electric co-op in the northwestern United States, Peck said.
The average cost of electricity in Montana is only 10 cents per kWh. Neighboring states also have much lower costs than Beartooth with Wyoming averaging 10.2 cents per kWh, Idaho averaging 9.4 cents per kWh, and North Dakota averaging only 8.9 cents per kWh.
Peck said Beartooth is currently paying Southern $70 per mWh. Electricity costs have been decreasing though with the potential for supply to be purchased for as little as $30 - $35 per mWh, he said.
Approximately half of Beartooth member’s electric bills are for electricity supply costs while the other half is for delivery costs.
Due Diligence
Arleen Boyd serves as chair of Beartooth’s due diligence committee. The committee was formed in 2012 following a board resolution in the wake of Southern’s bankruptcy declaration to not make any additional investments without due diligence.
The sooner Beartooth gets out of Southern, the more money it saves, Boyd said.
A group of dedicated volunteers have worked hundreds of hours in an effort to help improve Beartooth, Boyd said. Volunteers frequently provided expertise, and additional expertise was hired when needed. Boyd estimates the volunteer work would have cost more than $500,000 had the volunteers been paid a nominal wage for their efforts.
Thanks to the efforts of the current board, interim manager Peck, and the volunteer efforts of many members, Beartooth exited bankruptcy in a much better position than was thought possible, Boyd said.
Beartooth remains part of Southern to this day, Boyd said. Beartooth is still contracted to buy power from Southern, thought the length of the contractual obligation was reduced during Beartooth’s bankruptcy. The original contract required Beartooth to purchase electricity from Southern for 40 years. The new terms require Beartooth to purchase electricity from Southern until Beartooth’s share of Southern’s debt is paid. Beartooth’s share is about 17 percent of Southern’s $21 million debt, Boyd said.
Boyd said Beartooth is working very hard to get out of Southern. Last week Southern’s board passed a resolution to close when its debts were paid. Beartooth hopes to be free of Southern by the end of 2015, Boyd said.
Beartooth’s bankruptcy ended up costing more than $6.3 million without counting the time and expense incurred by the board, staff, and committee members.
“This looks awful and we are not doing this anymore,” Boyd said.
Beartooth has been talking with electricity suppliers for the past three years, Boyd said. The co-op is working to have a responsible approach, she said.
Due diligence efforts for the co-op today are focused on three things: leaving Southern, partnering with Lower Valley Energy for management, and having a management team smart enough to help brings costs in line, Boyd said.
“The only way to measure anything is with numbers,” Boyd said, noting that she borrowed the quote from Lower Valley CEO Jim Webb.
New Management
Beartooth has now entered into a management arrangement with Wyoming-based utility cooperative Lower Valley Energy.
Lower Valley CEO Jim Webb said co-ops have had to do the hard job of providing electricity to rural areas. Electric co-ops originated in the 1930s because investor-owned utilities would not provide electricity to low-density areas, Webb said.
Webb said Lower Valley is all about low rates. Lower Valley has tried everything possible to keep utility rates low for its members, Webb said, including often being willing to think outside the box and try something new.
Lower Valley’s rates have actually declined since the 1980s when adjusted for inflation, Webb said.
The new management arrangement calls for Lower Valley to manage Beartooth for a period of three years. Beartooth will remain a separate legal entity with its own board of directors. Lower Valley will provide management, engineering, and negotiation of power contracts. Beartooth will also maintain a separate rate structure.
The shared overhead with this arrangement can help keep costs down for both co-ops, Webb said.
Both co-ops use the same software and billing company. The possibility of merging software and billings is being evaluated. Similarly, both co-ops use the same suppliers for materials so combined purchasing can provide additional cost savings.
One possibility in the future is for Lower Valley and Beartooth to merge, Webb said. A merger would require approval from Beartooth and Lower Valley members, as well as the Wyoming Public Service Commission.
Webb offered Beartooth members his personal guarantee that if the shared management arrangement did not work as expected that Beartooth could look to other solutions.
“I don’t want to be a boat anchor to Beartooth,” he said.
Challenges for Beartooth
Beartooth faces several challenges moving forward from its past financial problems. Some of these challenges include operating costs, revenue sources that are not growing, low revenue per meter, and having no economies of scale.
The shared management agreement helps to address some of these challenges.
Rate Reductions
Beartooth is finally in a position to be able to afford to lower rates for the first time in a very long time, Boyd said. The co-op can afford a rate reduction of 5 percent in 2015, Boyd said, with another 5 percent after leaving Southern.